Why trade openness and national security go together
David Ricardo, one of the world’s most influential classical economists, was both tremendously successful and enjoyed lasting fame. Ricardo made most of his money (estimated to be $100 million in today’s terms) speculating on the outcome of the Battle of Waterloo, where Napoleon Bonaparte was defeated by the British Army led by the Duke of Wellington. Ricardo, whose friends included other intellectuals like James Mill, Thomas Malthus and Jeremy Bentham, made his fame with his book Principles Of Political Economy And Taxation (1817). In Principles, Ricardo introduced the law of comparative advantage, as a model where economic participants have a comparative advantage in producing a particular good or service if they can produce that good at a relatively low opportunity cost. Even though Ricardo’s law has been tested and updated since then, the core proposition of comparative advantage is the basis of an inter-dependent world in which trade has grown from about $50 billion in globally traded exports just after World War II (WW II) to about $19.5 trillion today. The upward momentum in global trade actually began in the early 1800s, during the industrial revolution, but paused during the two World Wars before it resumed again.
Four factors are giving rise to another pause in global trade. One, the global financial crisis (GFC) of 2008 that set in place a global recession, which, among other things, triggered a populist backlash; two, populist governments in several major countries from the US and Brazil, to the UK, Russia and Japan, which have followed either overt or covert protectionism; three, activism from the “other 99%” protesting inequality and lack of opportunity; and four, the Sino-US trade war which has added intellectual property theft, patent infringement and dumping to the anti-globalization rhetoric. To these four factors, the most recent addition has been the “distancing” between countries as a literal and metaphorical consequence of the covid-19 pandemic.
The rise in global trade over the last seven decades has also been supported by post-war institutions, like the World Trade Organization (WTO), that were created to foster global interdependence. Even the World Health Organization (WHO), which does not have suo moto powers, is part of this post-war global framework. US President Donald Trump has famously withdrawn from the WHO, is ambivalent about the North Atlantic Treaty Organization, and regularly skates the regulatory line with respect to trade with China. Beijing too prefers a bilateral trade discussion with the US and has followed its own brand of trade diplomacy with the Belt and Road Initiative. The architecture of internationalism that has held together for 70 years is fighting for its survival.
It is in this ambience that India has declared its economic response to the covid-related crisis as an approach centred on Aatmanirbhar Bharat, which means self-reliant or self-dependent. The government has gone great lengths to emphasize that this self-reliance permits an outward focus. In recent days, India’s border skirmish with the Chinese in Ladakh has added to the nationalistic and protectionist chorus. Prior to the pandemic, India had total annual exports of about $330 billion and total imports of about $620 billion, leading to a negative trade balance of about $300 billion. Until recently, India-China bilateral trade was among the fastest-growing relationships in the world, with India importing $75 billion and exporting about $18 billion. The bilateral deficit of about $57 billion would be okay were it not for the fact that the terms of trade are pretty poor for India, which exports commodities (agricultural, mining etc.), but imports a wide variety of finished goods from mobile phones to durable electronics. China remains a major supplier of raw materials for the Indian pharmaceuticals industry.
India must, of course, uphold its territorial integrity by diplomatic measures and by military means if absolutely necessary. Protectionism is a blunt economic weapon that in many ways threatens us more than any intended other party. As Nitin Pai of the Takshashila Institution has succinctly said, the best China policy for India is 8% real economic growth. In order to get back on that trajectory, India will need a major contribution from global trade. Trade creates a virtuous cycle of competitive dynamism, employment, capital flows and economic growth.
The government has needlessly complicated our economic response with the self-reliance slogan. It evokes ghosts from the past of import substitution and protection of weak local industry. A much more modern and robustly open policy of trade, technology acquisition and excellence is in India’s national interest.
Only economic strength can result in true self-reliance. Ricardo’s law still applies to the status quo. The only way to change the status quo is to acquire the know-how to build globally competitive products. In the short-term, localizing increases costs to the economy and disproportionately impacts the poor (yet another tax on them). Insisting on an under-thought approach to self-reliance at this time is akin to thumping a chest with weak lungs at the time of a pneumonic plague.
PS: “I do not want my house to be walled in on all sides and my windows to be stuffed. I want the culture of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet by any,” said Mahatma Gandhi.